• We believe the sale of RSDH to TPG Columbia could lift the valuation of Sunway Health Group (SHG) by up to 51%.

• Listing of SHG still slated for 2026F but we project a more realistic valuation.

• Reiterate Add on Sunway and TP of RM2.57 (10% discount to SOP).

Not Shortlisted for RSDH

• SHG was not shortlisted for the acquisition of Ramsay Sime Darby Healthcare (RSDH), a 50:50 JV between Sime Darby and Australia’s Ramsay Healthcare. Based on an article in The Edge dated 7 Nov, citing unnamed sources, TPG-backed consortium Columbia Asia (TPG Columbia) has emerged as frontrunner to buy RSDH for c.US$1.5bn (c.RM7bn).

• According to Sime Darby’s 2023 annual report, RSDH owns 1,530 beds in total, across 4 assets in Malaysia (Subang Jaya Medical Centre, Ara Damansara Medical Centre, Bukit Tinggi Medical Centre and ParkCity Medical Centre) and 3 hospitals in Indonesia.

Upside to SHG’s Valuation Assuming Similar EV/EBITDA Multiple

• According to Sime Darby’s 2023 annual report, RSDH reported EBITDA of RM302m in FY6/23 (FY6/22: RM266m). Hence, we estimate that the potential sale of RSDH to TPG Columbia at RM7bn (enterprise value of RM7.3bn) will translate to an EV/EBITDA multiple of 24x for FY23F.

• We have valued SHG at an EV/EBITDA of 15.8x, translating to RM7.2bn value, in our SOP valuation. Assuming a similar multiple of 24x EV/EBITDA, our valuation for SHG rises to RM10.9bn (+51%) and our SOP for Sunway climbs to RM3.40 (our TP is based on a 10% discount to SOP). We also take comfort in the fact that Sunway has shown financial discipline in not overpaying for acquisitions, such as recent land deals and not aggressively pursuing RSDH at potentially lofty valuations.

IPO of Sunway Healthcare Group Still Slated for 2026

• In our view, this does not derail SHG’s potential IPO in 2026. As at Nov 2023, SHG has 3 hospitals in its portfolio, with a total of 1,563 beds (including the expansion of 2 hospitals slated for completion in 4Q23). It also has a healthy pipeline of hospitals coming on stream, namely Sunway Medical Centre (SMC) Ipoh and SMC Damansara, which will add a combined c.600 beds.

• In late-Aug 2023, management alluded to a listing EV/EBTIDA multiple of 20x and EBITDA of RM800m-900m for SHG, implying EV of RM16bn-18bn. However, this guidance likely factored in the potential RSDH win. We think a more realistic expectation is for EBITDA to hit the RM500m-600m range in FY26F (vs. c.RM300m in FY22).

• We believe SHG’s strength and execution expertise are demonstrated by the increase in its 1H23 revenue and pretax profit by 38% and 29% yoy, respectively, despite startup losses from SMC Penang and Sunway Sanctuary.

Reiterate Add and TP of RM2.57

• We reiterate our Add rating and TP of RM2.57, based on a 10% discount to SOP. We like Sunway as a diversified investment proxy for a robust domestic economy and its growing exposure to healthcare. Key downside risks: a slowing economy and rising raw material costs, as both may have a negative impact on margins.

Source: CGS-CIMB Research - 8 Nov 2023